Ray Gronevelt and Mike McDonald, both financial planners with AAA Michigan, provided the following answer to this important question.
Every retail business should have a plan that ensures the business is secure in the event an owner or a partner dies unexpectedly or becomes permanently disabled and can no longer participate in the business. The family or the estate of the deceased or disabled partner must also receive fair value for their share of the business.
If you died or became disabled your family members might inherit your share of the business but not possess the skills required to run it successfully. Furthermore, surviving partners may not welcome an unintended new partner.
To help avoid this situation, a prearranged Buy-Sell Agreement can prove beneficial. A Buy-Sell Agreement is a legal contract between a business owner and someone who agrees to buy that owner’s interest in the business, usually one or more of the business partners.
In addition, these arrangements often contain a formula for setting fair value on the owner’s share of the business.
Buy-Sell Agreements are typically funded with a life insurance policy taken out on each partner. When the insured person dies, the death benefit is paid to the beneficiary designated to buy the deceased partner’s share—who, in turn, pays the money to the deceased’s family in exchange for the deceased’s previously owned share of the business.
Some business owners are concerned about whether the sale executed from the Buy-Sell Agreement will have to go through probate court. Probate can usually be avoided through proper planning.
Generally, probate is unnecessary if the terms of the sale to the surviving partner(s) are specific. Probate may be required if the agreement specifies the deceased owner’s estate as a settlement party.
Business partners can also be protected against a fellow partner’s permanent disability. The benefits from a disability income insurance policy would be paid to the able partner(s) and then used to fund the buyout.
Another option to consider is a Key Person Agreement, which can help protect against the disability or death of an individual instrumental to sales or the operation of a business.
In a Key Person Agreement, the death benefit from a life insurance policy is paid to the business as a means of replacing lost earnings and covering the cost of finding and training a replacement.
Consult your financial planner, attorney or life insurance agent for more information on structuring a Buy-Sell Agreement or a Key Person Agreement.
